U.S. consumer prices register slight gain in July

Shoppers leave with check out with their purchases from the Best Buy store in Westbury, New York November 27, 2015.

Retail food-at-home prices rose 0.3 percent in July, according to the Consumer Price Index (CPI), the first 12-month increase since November 2015 and a signal of easing deflation. Economists polled by Reuters had expected the CPI to rise 0.2 percent in July.

The increase more than offset a 0.1 percent decline in energy prices. That lifted the year-on-year increase in the CPI to 1.7% from 1.6% in June.

But economists can't stress enough that the central bank will have four more reports to review before it needs to decide late year whether or not to raise short-term interest rates again, as had been previously projected.

That's a major divergence from the dot plot, which prices in one more cut this year followed by three more in 2018. That shows that inflation pressures remain well under control.

Does this matter? Fed chair Janet Yellen is already on record noting that the outlook for inflation is now critical to the outlook for interest rates.

The modest gain in consumer prices, coming on the heels of a drop in producer prices in July, could worry Fed officials who have largely viewed the retreat in inflation as temporary. "So we're not going to get to a year-over-year number of 2-percent until some of these very low readings drop out of the statistics 6 to 10 months from now".

Core inflation, which excludes volatile food and energy costs, also fell last month by 0.1 percent.

Chris Low of FTN Financial said the report showed a "stunning array" of falling prices.

Economists also cite retailers' lack of pricing power and still-tepid wage gains as factors keeping price pressures subdued, with the July results another sign inflation may take longer to reach the central bank's goal even as it prepares to wind down asset holdings. He said a weakening USA dollar convinced some economists that inflation would finally kick in by July. The reason for this is that so many commodities around the world are priced in Dollars and the volumes are so great it's unlikely the value will collapse. "Goods prices, both headline and core and specifically in the USA, are going to rebound in the next three or four months", he said in a video for clients last week.

Dudleyalso cautioned that "it's going to take some time" for inflation to rise to the central bank's 2 percent target even as he offered a generally positive outlook for the US economy, job market and price pressures.

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